The courier, express, and postal industry is the largest segment of the transportation marketplace worldwide. This blog will provide a personal perspective on the challenges faced by firms in the industry as they serve an increasingly competitive market.

Monday, January 25, 2010

In a previous post, "Re-Regulating the Postal Service?", I noted that the Postal Regulatory Commission's (PRC) interest in examining the Postal Service's FY 2009 Annual Compliance Report represents the potential for a mini rate case. Now that the PRC has chosen to proceed, this has happened. In addition, the PRC has chosen to enter uncharted territory, examination of the Postal Service's financial and business plans by asking whether the Postal Service generated sufficient revenue in 2009 "to assure adequate revenues, including retained earnings, to maintain financial stability." [39 U.S.C. § 3622(b)(5)]

Overhanging all of the specific areas of inquiring discussed below, postal stakeholders face a concern that hangs over the entire proceeding. If the PRC find the Postal Service to not be in compliance with any of the ratemaking rules included in 39 U.S.C. § 3622, can it force the Postal Service to file an exigent rate case to put it in compliance?

The Mini Rate Case

The scope of the PRC's mini rate case will likely focus on the following three areas:

Computational and typing errors in the Compliance Report and accompanying workpapers.

The first two areas could have a significant impact on mailers that now generate at least 63% of the revenue and 79% of the volume of the services covered by price regulations.

Products With Revenue Below Attributable Costs

The Following products had revenue below attributable costs.

Inbound single-piece international mail

Standard flats

Standard parcels and non-machinable flats

All Periodical Class products

Single Piece Parcel Post

Bound Printed Matter Parcels

Media Mail/Library Rate parcels

The list of products includes mostly flat and parcel shaped products. The list includes products that have costs that are difficult to measure because the total volume handled is so low.

To the extent that the Postal Service and mailers want to address this question, they may want to address the following two questions.

How relevant are 2009 costs for 2010 and beyond given that the handling of flats and parcels as the processing and transportation technology networks handling this mail will be different in 2010 and beyond from the networks used in 2009?

Are sampling systems capable of accurately measuring the costs of low volume products?

The Size of Worksharing Discounts

Most of the questions contained in the Chairman's Information Request #1 focus on whether the Postal Service's worksharing discounts comply with 39 U.S.C. § 3622(e)(2). This section sets the rules for the specific rates for all mailers sending more than 500 pieces at a time, mailers for whom 80% of the money spent on mail is spent in competitive markets for services required before the mail is handled is tendered to the Postal Service. This section requires that worksharing discounts be no greater than cost savings with four rather limited exceptions.

The discount is associated with a new postal service, a change to an existing postal service, or with a new work share initiative related to an existing postal service or the discount necessary to induce mailer behavior that furthers the economically efficient operation of the Postal Service and the portion of the discount in excess of the cost that the Postal Service avoids as a result of the workshare activity will be phased out over a limited period of time.

The amount of the discount above costs avoided is necessary to mitigate rate shock; and will be phased out over time.

The discount is provided in connection with subclasses of mail consisting exclusively of mail matter of educational, cultural, scientific, or informational value.

Reduction or elimination of the discount would impede the efficient operation of the Postal Service.

These exceptions indicate that the PAEA does not favor the use of market-based, or non-cost based rates for customers shipping more than 500 items at time with the exception of discounts that have a very short duration like a sale. The section also enshrines differences in rates for editorial content in periodicals from the advertising content. Only the last exception, "reduction or elimination of discounts that would impede the efficient operation of the Postal Service," provides a crack that might let the light of market-based into the process.

The PAEA does provide some limitation to a strict cost based approach in 39 U.S.C. § 3622(e)(3), but again the language in appears to focus on enshrining the rate relationships that existed when the PAEA was passed, and protecting the rates of single-piece mailers. The language requires that the Postal Service prove that 1) raising rates that are lower than cost differences may indicate would reduce the volume of the products that use the product and lower the Postal Service's net income; 2) the rates do not increase rates of products that do not use the discount.

In answering the PRC's questions on worksharing discounts, the Postal Service and mailers need to go beyond answering the computational issues, and illustrate the value of market based rates using the exceptions and limitations as the basis for their argument.

Determination of Rates Necessary for Financial Stability

In raising the question of whether rates are sufficient for financial stability, the Commission addresses the question of financial targets and financial plans. The Commission's asked the Postal Service to "provide the Postal Service’s current plans to achieve financial stability in FY 2010 and beyond under the Postal Accountability and Enhancement Act (PAEA) to enable it to meet its principal responsibilities" in Commission Information Request No. 1.

In the old regulatory process, the question of financial targets was set in the revenue requirement. Once the rules were set in the first few rate proceedings, the PRC's limited its analysis to checking that the Postal Service's calculations were correct. The PRC rarely if ever questioned whether the revenue requirement generated sufficient cash to make the capital investments necessary to streamline mail operations and reduce operating costs or to reduce the postal workforce at a pace commensurate with the introduction of automation and streamlined operating and delivery networks.

Questions of "sufficient financial returns" never were addressed. Mailers had no interest in raising the issue, as their concern was keeping rates down, not maintaining a financially viable Postal Service. In many ways, the PRC also tended to focus on ways to reduce the revenue requirement, even if the reductions were minuscule and based only in errors in calculation or changes in economic forecasts during the course of the 9 month rate proceeding.

I have raised the issue of self sufficiency, a number of times in this blog and in my paper, Examination of Potential Postal Business Models. In that paper I stated: "Given the outsized operating losses in 2008, 2009, and most likely in 2010 and the elimination of cash available for anything but absolutely critical capital spending, there are substantive questions about whether the current postal business model and regulatory framework can ever generate sufficient levels of cash to ensure long-term postal financial self sufficiency." Postal forecasts of revenue and volume indicate that these questions could remain through the middle of this decade.

In that paper, I further noted that postal operators outside of the United States have real financial return objectives. Postal policy in these countries understands that universal service requires that the postal operator earn a financial return that will sustain the business. To meet this financial objective, postal policy in these countries grants the postal operators sufficient commercial freedom to manage all aspects of the business to meet these objectives and provide universal service. In addition, postal operators manage the business under standard business, and tax law, and employment and labor law similar to what private sector firms operate under.

Most recently, the Canadian government re-evaluated Canada Post's financial objectives and set higher targets to allow for the modernization that is necessary there. The re-evaluation has led to higher rates on postal products, and increases of 2 cents each year from 2010 to 2012 for single piece mail.

Congress cannot act on future business models unless it has an independent assessment of the financial plan of the Postal Service under both the current law and the changes in law that it has proposed in testimony to Congress and in its paper, Assessment of U.S. Postal Service Business Model. It is not clear whether a formal regulatory process will provide that assessment in a format that is useful for advancing postal policy changes in Congress that will ensure the Postal Service's financial stability. Given the reluctance of postal stakeholders to suggest changes in the business model that could improve financial viability of the Postal Service without increasing rates, as well as the cost of producing those studies, the PRC will have little information on the record on alternative business plans that could meet the PAEA's financial goals.

Mailers and the Postal Service have additional immediate concerns about potential actions that the PRC could take if it determines that the Postal Service is not in compliance with postal law. The Commission's powers and authority once such a non-compliance determination is made is unknown. As such, much of the discussion at hearings and in documents filed with the PRC will focus on defining its authority and not the changes needed to make the Postal Service financially viable and the business model and regulatory framework that will allow that to happen.

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Blog Author

Alan Robinson is the President of the Direct Communications Group and an associate of Analytic Business Services (AnaBus). He has over twenty years experience helping firms and government officials deal with the regulatory, policy, marketing, and management issues associated with changes in competition within transportation, parcel delivery and postal markets.
He can be reached at alan.robinson@directcomgroup.com